I have seen the light

Finally I have seen the light!

Firstly, I have stopped buying UK banks! Although my theory that the government will not allow them to fail is correct, the banks can keep diluting my holding by issuing more shares to the government. The tax payer already owns 65% of RBS!

So enough is enough! All businesses are not created equal. In the good times banks can give a very nice return on equity but in the bad times they can easily go bust if they have not been managed cautiously enough. I am not selling my banks shares as they are barely worth anything anyway. They can hang around in case one day they are worth something.

Luckily the losses I have made have not been fatal. I am still in the early days of my investing career and have been taught a very vivid lesson about the importance of diversification.

The second revelation I have had is that portfolio ratios do work. If I had had a rule that 20% of my portfolio must be in cash then as the stocks in my portfolio fell I would have had to buy some more to maintain the 20% ratio. This would meant I would have picked up some cheap stocks on the way down. Then when (if!) stocks rose again I would be forced to sell some, locking in some profits.

Also if I had had a rule limiting me to 20% in one sector and 10% in one company then I would not have been so exposed to UK banks.

This is all pretty basic stuff that I had read a long time ago but it seems that I have to learn things the hard way.

Here is a sample collection of rules for a medium risk portfolio:

20% cash
No more than 20% in one sector
No more than 10% in one company
No more than 50% in US stocks.
No companies with a market cap. less than £1 billion

And here is an idea for a high risk portfolio:

10% cash
No more than 20% in one sector
No more than 20% in one company
No more than 50% in US stocks.
No companies with a market cap. less than £0.2 billion

And finally here is an idea for a high yield portfolio:

No cash
No more than 10% in one sector
No more than 10% in one company
No foreign stocks
No companies with a market cap. less than £5 billion

I have 4 portfolios in all: 1 high risk, 2 medium risk and 1 high yield.

Over the next year I will be slowly adjusting the portfolios to meet these rules. Any adjustments will be made at opportune moments in order to keep trading costs down.

My main portfolio is 40% in Genzyme! This obviously rather breaks the rule of no more than 10% in one company. So I will have to take some profits on that one. Oracle looks like a suitable parking place for the proceeds.

Best of luck!